Target Identification

The best acquirers are proactive, not reactive. They don’t rely on investment bankers to bring them deals. They are actively engaged in the hunt. They conduct M&A thoughtfully, carefully, and with plenty of due diligence. The starting point? Identifying potential targets that make sense within the company’s overall business portfolio.

For any large company, growth through acquisitions is likely to be a key component of corporate growth strategy. Growth drives value creation, and acquisitions can offer a path to growth when organic options are limited. But the hard truth is that acquisitions are more likely to destroy value than create it. On average, more than 50% of all acquisitions lead to a decline in relative total shareholder return after one year.

Effective target identification is built on the foundation of a sound portfolio strategy. Such a strategy identifies the most promising market segments for growth, assesses whether organic or acquisitive growth is the best way forward, and defines the commercial and financial hurdles for potential deals.

Companies need proven methodologies to ensure that target identification is based on solid research, not guesswork. Companies that have done their homework are prepared to take advantage of unexpected acquisition opportunities when they arise.

Acquirers that take a structured approach to acquisitions benefit from institutional learning to make better acquisitions over time. Every deal is different, but in our experience, six steps are essential to successful acquisition.

The first three steps, explained below, help identify promising companies that can bring value to the corporate portfolio. The other three steps take the buyer through the due diligence process, negotiation, and preclose integration planning.

The first major turning point where acquirers can create or destroy value is finding the right target.

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Identify potential segments. By conducting a comprehensive screen of the industry value chain and ecosystem, future sources of profit can be identified, as can emerging applications, disruptive technologies, customer purchasing preferences, and the key sources of defensible competitive advantage.

Develop lists of targets. Based on interviews with market and company experts, market segments in which acquisitions have the ability to create value can be recognized, and an initial list of potential targets based on detailed screening criteria can be developed.

Prioritize targets. The final step is to reduce the broad universe of potential targets to an actionable list of priority targets. This list is based on the acquirer’s parenting strategy, the potential for value-creating synergies, and the availability of the asset in the market.

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